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CHAPTER 8 - TERMS OF YOUR DEAL

Know what you want, what you can afford and what you will give up.

How Long?
This should be based on your financial pro forma or the useful life of the asset being financed. Receivable and contract financing are less than 12 months, equipment normally one to five years, real estate and other long term assets 5 to 20 years.

Amortized versus Interest Only
Most ventures take some time to begin making money. New equipment or other acquired assets take time to begin paying for themselves. Think about an initial period of interest only or skip payments to offset your lack of cash flow.

Interest Rate
The rate you pay for the funds you need can directly affect your profitability. On the other hand, if by paying 50% interest, you yield 100% profitability, you are way ahead of where you began.

Fixed or Adjustable
With a fixed rate of interest you know where you are. With adjustable rates you're betting on the future. Anybody remember Jimmy Carter interest rates? Normal is Prime plus one to three percent or LIBOR (London Index) plus three to five percent. Rates vary as you add or subtract risk.

Points and Fees
Most, if not all, funding sources charge points (percentage of amount funded) and fees (costs of putting your transaction together). These can run from 1% to 10% depending on what you're looking for and the degree of risk. Fees are sometimes payable 50% at commitment and 50% at closing. Try to get 100% at closing or at least deposit the 50% into a trust or escrow account. Beware of those sources who must have your money before you see their's.

Prepayment Penalties
Funding sources spend time, energy and money picking deals to invest in. Once they lend or invest they want to stick with it. Pre-payment penalties are one way to insure you'll leave the funds in place. Try to negotiate these away, or limit them to one or two years.

Blanket & Specific Liens
Blanket means "all". Specific is just that. Blanket liens will restrict your ability to raise cash in the future. Always attempt to have specific liens.

Personal Guarantees
How committed are you? If you won't sign personally, then you may not get any money. This is a gut check. If you don't believe in your success, why should anyone else? As you and your company perform, you should be able to get these released.

Covenants & Conditions
Be very careful. These spell out just what you can and cannot do. No management or ownership change, quarterly filing requirements, no borrowing from anyone else, deposits maintained, collateral pledges, etc. Read and evaluate the fine print.

% Ownership You Will Offer
What's fair? 80%, 50%, 20% I can't tell you. You must define it, support it, and defend it. While most lenders won't ask, most investors will demand. Be prepared from the start. Do your homework on your potential funding sources.

Stock Repurchase Agreement?
What happens if you hate your investor? Are you locked together forever? Try to negotiate escape clauses that will allow you a way out if you need it or can afford it. Be able to buy your stock back at a predetermined price, if possible.

Management Controls?
Most entrepreneurs are in business to make decisions for themselves. Some investors want almost a partnership. Once again, pre-plan and know what you are looking for and what you are willing to give up.

Collateral Anyone?
Will you risk it all? If you don't believe, neither will anyone else?

  • Accounts Receivable
  • Contracts
  • Equipment
  • Inventory
  • Marketable Securities, CD's, T-Bills
  • Purchase Orders
  • Real Estate
  • OP (Other Peoples )

Workbook Main Menu I To Chapter 9

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